Monday, June 18, 2012

I'm a long-time California resident and I'd like to think I'm about as well-informed as anyone when it comes to California's budget woes, but I was shocked to read this article about how California legislators' decision in 1999 to retroactively boost the retirement benefits of state employees has cost taxpayers an extra—and unexpected—$2 billion per year.

... On Sept. 10, 1999, [California legislators] decided that investment gains would cover 100 percent of the cost of retroactive pension increases they granted that day to hundreds of thousands of state workers.

The politicians made the wrong bet -- and the result has been a penalty to California’s budget that has averaged $2 billion a year ever since and that will cost the state billions more for decades to come. Promising that “no increase over current employer contributions is needed for these benefit improvements,” and that the state pension fund would “remain fully funded,” the proposal, known as SB 400, claimed that enhanced pensions wouldn’t cost taxpayers “a dime” because of healthy investment returns.

Since then, the pension system has earned only 75 percent of what it had hoped. Because the state is unconditionally on the hook, the state budget has had to make up the difference. As a result, the state has spent $27 billion on pensions, $20 billion more than Calpers projected.

To finance the $20 billion of extra cost for pensions, the state has cut spending on services and raised taxes. As one example, spending on the University of California and California State University systems declined 18 percent from 2002 to 2012, while state spending on pensions rose 214 percent.

This issue—the huge and still under-appreciated burden on taxpayers of public sector pension benefits—is going to remain front and center for a long time. Politicians make business and investment decisions—in this case overly-generous pension promises—that end up failing spectacularly, saddling taxpayers with the losses. This kind of stuff has got to stop. It's one more good reason for limiting the size and scope of government.

This article just proves the old adage that "the worst investment decisions are made during the best of times". It is the over-confidence and hubris produced by several great years of stock market returns.

California isn't the only entity guilty when it comes to making this type decision. Many states and corporations under-funded their retirement plans in the late 1990s because of the same over-confidence in market returns. Now with 10 years of flat market returns, they are having difficulty in meeting their plan obligations resulting in greater demands on tax payers.

To make matters worse, many of these state pensions obligations to existing retirees are consitutionally protected- which means that the legislatures will have to raise taxes to pay for the benefits unless state constitutional amendments are passed.

I was flying into Nairobi Kenya at 3000 ft a couple years in a charter plane. I asked our safari guide what were all the large houses on large estates (thinking they were Europeans left over from colonial days). He said they were all government employees.

The ruling class is no different here. Public sector compensation is double the comparable private sector job. Double!

Scott-Like the Argentinians I have sympathy for the suffering but not for the society. California gets what it deserves and while I know that you don't vote for these policies, it is evident that the majority of Californians, over time, has expressed a preference for destructive policies. There are numerous lovely places in the US to live where you can avoid the depredations of the liberal culture that is intent on ruining the Golden State. You cannot be shocked at this point over anything that comes out of Sacramento. If you still live there, that means the utility you get is still greater than that which your fellow citizens can destroy via their elected representatives.